Saturday, August 24, 2019

Our inbox was humming this week when news broke that Patrick Byrne, the founder, CEO and guiding light of Overstock.com (OSTK, $20.58 for you home-gamers), had resigned from his post as CEO and from the Overstock board of directors, following the disclosure that he had been involved in FBI probes concerning “political espionage conducted against Hillary Clinton and Donald Trump” since 2015. We cut our blogging teeth with Patrick Byrne stories, as many longtime readers know, starting with the one we're reproducing below, from early 2005, a good decade before Byrne and the FBI became an item. Our interest in Byrne and Overstock.com began innocently enough when a good friend and the best short-seller we have ever known suggested looking at Overstock.com as a short. Since this advice came from a guy who could--and still can--smell a scam before he even meets the scammers, we began to take a look. Around the same time, however, another friend, one of the best retail and apparel investors we ever knew, suggested going long Overstock.com. He had visited the company and thought Patrick Byrne was “the best CEO I've ever met,” quote/unquote. So we stayed on the sidelines, short-selling-wise and going-long-wise, but started listening to the Overstock earnings calls, and we're glad we did, blogging-wise. It was like dropping down Alice's rabbit-hole and finding a Strange New World of conspiracy theorists, the likes of which we had never heard on the earnings calls of a publicly-traded company--their main conspiracy theory being that short-sellers were brazenly selling shares of Overstock.com stock without first borrowing them, as required by every regulator known to Wall Street (so-called “naked shorting”). Since we'd never worked with, or known of, a short-seller who did that, and since we had worked with several professional short-sellers and knew most of the rest, it was a conspiracy theory we found hard to fathom. So we wrote a blog about it. In hindsight, your editor kind of wishes he had let the conspiracy theorists stew in their own juices, without trying to help them understand the way the world of professional short-selling actually worked. But--and this is a big “But”--it turned out the conspiracy theorists were right about one thing: shares of Overstock really were being sold without having been borrowed. It's just that the prime-brokers were the bad actors, not the short-sellers. All that wouldn't come out until the financial crisis, however, well after the damage was done. In the meantime, Patrick Byrne's obsessions became the gift that kept on giving, blogging-wise, and not merely from his commentary during the public earnings calls: your editor has long suspected Dr. Byrne himself contributed to the comments here in these financial columns, under an assumed name. But now the curtain has come down on his role at Overstock.com, and, in truth, we harbor no ill-will towards Patrick Byrne or the company he built. For one thing--let's give credit where it's due--Patrick kept Overstock.com going long after many, many, many dot-coms fell by the wayside, or worse. For another, your editor actually visited the company, long after the dust had settled on the naked short-selling conspiracy battle, at its then-new peace-symbol-shaped building at the suggestion of the short-seller who long ago had suggested looking at Overstock.com as a short...only this time, he was, correctly, long the stock. We went there to size up the company's then-nascent efforts in bitcoin, and found the building full of very smart, very hard-working people who all seemed to share an honest respect for Patrick Byrne. And, full disclosure-wise, your editor did go long Overstock.com, and profitably, until, as unfortunately tended to happen over the years, the rabbit hole kept leading nowhere, results-wise. Patrick wasn't there the day we visited, but we did peak into his office. There aren't many CEOs with a Bob Marley poster above their desk. It made your editor wish he'd visited Patrick back in the day, face-to-face, instead of trading comments on these blogging pages sub rosa. We could have instead swapped stories about the Bob and the Wailers concert at the Music Hall in Boston, in the summer of 1978, a few months before we started in this business of getting and spending as a junior analyst at a once-great but long-since-gone company called Merrill Lynch, Pierce Fenner & Smith. It was a great show, Patrick.--JLM

When CEOs ObsessOverstock.com is a high-flying company whose CEO, Patrick Byrne, has a problem with success. His problem, specifically, is that the success of his company has attracted short-sellers of Overstock.com's stock.While I do short stocks occasionally as part of my investment strategy, I am not one of the short-sellers Mr. Byrne--actually, Doctor Byrne--goes after on his earnings calls and in his erudite shareholder letters. The shorts he goes after are so-called "naked" shorts, meaning they have not actually borrowed the shares of Overstock which they have sold short.Not only is naked selling short illegal, it is, from my vantage point: a) stupid; and b) not the way any professional short sellers I know go about their business.So I think Doctor Byrne is identifying a problem that doesn't exist. And if it does exist in the case of Overstock.com, then those so-called naked shorts, whoever they are, will eventually have to buy back the shares of Overstock they have shorted--a good thing for the Doctor and other shareholders of Overstock, should they ever need an exit strategy. He should be thanking the idiots doing the illegal deed--not obsessing about them.Why write about Overstock without having a dog in this fight? Simple: I have found in my 25 years' investment experience a very high correlation between companies whose CEOs obsess about short-sellers and the eventual self-destruction of those companies.CEOs who obsess about a non-operating issue such as short-sellers usually have a very fragile business model--otherwise, they would not waste a second of their time on such useless speculation. Or they simply have something to hide--sometimes fraud, sometimes not. In general, what comes to mind when CEOs obsess about shorts are the words of Queen Gertrude--from Shakespeare, with whose work I'm sure Doc Byrne is very familiar: "The lady doth protest too much, methinks."And Patrick Bryne protests way too much.Bill Gates, as one example of a CEO whose stock has, in the past, been heavily shorted, never bothered to get worked up about any short-seller on any Microsoft conference call, ever: he just ran the business and let the stock take care of itself, and take care of the shorts along the way. In fact, when I am short a stock, I get very nervous if the CEO does not obsess about the shorts. It usually means he's playing a very strong hand.But don't try to tell this to Patrick Byrne, because today he's whining to Floyd Norris in the New York Times that "someone is manipulating our stock," and blaming the shorts for the recent 15-point drop following an earnings call that disappointed investors expecting positive surprises. (Bryne does not, by the same token, thank the shorts for facilitating the 60-point rise in the prior twelve months, nor does he grasp the fact that he and he alone is to blame for raising ridiculous expectations and then failing to meet those expectations during the company's earnings call.)Speaking of that call, you should listen to it. The whole replay. Especially the last twenty minutes, when Doctor Byrne fields a call from a man identifying himself as Bob O'Brien. "The name is not familiar," O'Brien says to Byrne, "let me start out by introducing myself."The "not familiar" Bob O'Brien then delivers a paranoid and wholly ignorant fantasy regarding the supposed short-selling conspiracy driving Overstock and other small cap companies into the ground, including factual errors regarding the mechanics of stock delivery and ramblings of an individual with far too much time on his hands and who probably has a difficulty distinguishing reality from The X-files.You will hear Doctor Byrne patiently let the man ramble, expressing surpise and interest in the caller's fantasy, and you will hear Doctor Byrne act wholly ignorant of where this Mr. O'Brien came from. "I don't know any of the stuff you are talking about but it is interesting stuff," Bryne says.Patently false.Turns out Patrick Byrne helped an organization called "National Coalition Against Naked Short Selling" pay for two Washington Post ads attacking naked short sale tactics. Turns out this so-called coalition is run by none other than the paranoid X-Filian Bob O'Brien.But don't take my word for it. It's all there in the interviews Byrne and O'Brien give to Floyd Norris in today's New York Times. Read the article and listen to the Overstock conference call, and tell me what you think.If a CEO will fib to Wall Street the way Patrick Byrne appears to be fibbing on his earnings call by hosting an orchestrated short-bashing rant from his "not familiar" friend Bob O'Brien, you never know what he might do when it comes to running a business.I am not making this up.February 28, 2005